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Mortgage Insurance

Mortgage Insurance

Why you should consider Mortgage Insurance


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For most of us, a home loan may be the biggest financial commitment of our lives. Depending on your financial strategy, you may eventually pay off your mortgage and enjoy the satisfaction of outright home ownership. The foundation of a loan is your ability to service a mortgage within a set timeframe to pay it off completely. In an ideal world, those factors would be entirely predictable, but the reality is neither are a certainty. Circumstances beyond your control could affect your ability to service the loan – the extinction of your job description through the development of new technology, the loss of your entire industry to overseas competitors, an injury, a long term illness – any of these variables could reduce your earning capacity and jeopardise your ability to maintain your mortgage repayments. In a worst-case scenario, your lifespan could turn out to be shorter than the term of your loan. Consider that there are almost 150 000 deaths per year in Australia – around 1200 on our roads alone – so unexpected losses are experienced by many families everyday.


There is one constant in all of these situations: your mortgage obligations to your financial institution remain and will need to be met. The consequences of reduced earning capacity could mean selling your home and then downsizing to keep your mortgage obligations manageable within the new parameters of your reduced income stream. If you are the sole breadwinner in your household, your untimely death would mean there is no income servicing the loan and the loss of your home would quickly become a very real possibility for your grieving family. It’s important to understand that if you’re a co-signatory on the loan with your spouse, they will assume responsibility for the loan. If you both die, or you are the sole signatory, the loan becomes the responsibility of whoever you name as the beneficiary of your estate in your will. If you had someone act as guarantor when you successfully applied for your home loan, they will be obligated to pay out the mortgage, or cover any shortfall if the house is sold and the lender is still owed money. Someone stands to inherit your debt.


Mortgage protection insurance

One measure you can take to shield you and your family from financial hardship if your earning capacity is reduced or you die is to take out mortgage protection insurance. Where lender’s mortgage insurance (LMI) protects the lender in the event that you default on your loan and they record a loss on the subsequent sale of your property, mortgage protection insurance is all about protecting you. It is effectively a life insurance policy for people with a mortgage where a lump sum is made available to you or the beneficiaries of your estate so that they can pay out the loan completely if your disablement or death means you will no longer earn an income. This type of mortgage protection is known as term life cover or total permanent disability insurance.


Mortgage protection insurance can also be put in place to cover mortgage repayments for a set period in the event of temporary disablement and involuntary unemployment. In each instance, strict conditions are attached, so make sure you carefully research and compare the various mortgage protection insurance products available on the market, or better still, engage an insurance broker to assist in setting up an insurance package that best suits your unique financial situation.


If you’re a first home buyer, you might consider mortgage protection insurance as simply another expense at a time in your life where you’re being stretched financially. You’re coping with the costs of raising a young family alongside that new home loan and besides, you’ll never be younger or fitter! But the reality is, your future is never entirely in your hands. The very fact that your life right now seems full of expenses means now is the most important time to insulate yourself from any financial hardship that could come your way. Illness doesn’t discriminate and no one is immune from an unexpected turn of events, so really think through the financial implications if your earning capacity was reduced or cut off altogether. Could you or the family you’ve left behind cope with the way your finances and insurances are currently structured? While you’re examining this and possibly making some adjustments, it’s also a good idea to make sure your will is up to date. The best gifts you can give your family are financial security and clarity.

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